The One Big Beautiful Bill is now law. It spells the beginning of the end for an abusive Medicaid financing scheme that states, including Connecticut, have used to siphon money from the federal Treasury, supposedly for health coverage for the poor.
Forty-nine states have used so-called healthcare provider taxes to bilk Uncle Sam. Under Medicaid law, Washington matches a percentage of Medicaid benefits paid out by states. Provider taxes let states collect federal matching dollars for money they don’t actually spend.
How does it work? State governments tax providers—mainly hospitals—but return much of the money right back to the hospitals, labeling it a “supplemental payment.” With this label, the returning money triggers a federal matching payment.
The federal matching funds have financed both Medicaid’s explosive growth and state spending unrelated to the program. Connecticut used federal funds from provider taxes to close its enormous state budget deficit in 2017. Connecticut has continued to rely heavily on the gimmick.
The scheme has fueled the ever-expanding growth of the Medicaid program; and it has been transforming Medicaid’s intended joint federal-state financing partnership into a 100% federal funded entitlement. The more that states have taxed providers, the more federal money they have obtained, the faster and larger the Medicaid program has grown, and the more funding responsibility has shifted to Uncle Sam. The Government Accountability Office began warning about this dynamic more than a decade ago.
Congress is to blame. By federal law, the Centers for Medicare and Medicaid Services could not take enforcement action against a state if it kept its provider taxes below a threshold of 6% of providers’ “net patient revenues.” Most states have stayed below this safe-harbor level. CMS hasn’t collect data on how much money states obtained through the gimmick nor how they spent it, apparently seeing no need to track activity it couldn’t regulate.
The OBBB law has imposed a moratorium on the creation of new forms of provider taxes and on increases in existing provider tax rates. Yet, forty-nine states have already established most of the potential forms of provider taxes. Forty-seven states tax hospitals, 46 nursing homes, and 13 impose a tax on hospitals exceeding 5.5%, according to the Kaiser Family Foundation. Still, the moratorium is important because it removes CMS’s authority to approve provider tax increases above the 6% safe-harbor threshold.
The moratorium took effect on July 4th, except for nursing homes and intermediate care facilities for which the effective date was May 1st.
The OBBB law goes further. It reduces the safe-harbor threshold by half a percentage point per year beginning in 2028 until 2032 when it will reach 3.5%. The threshold reduction does not apply to rates for nursing homes and intermediate care facilities, if they remain at their level as of May 1st.
The threshold reduction applies almost exclusively to hospitals and only in the 40 states which have expanded Medicaid under ObamaCare; for the expansion population, states have been receiving 90% federal funding. Thus, the new law’s focus is where explosive federal spending on Medicaid has taken place — an appropriate focus for a law intended to reduce federal spending.
The CBO has scored the enacted bill as saving $200 billion in reduced federal matching for provider taxes over ten years. The annual savings of $20 billion are a mere 2.2% of current annual Medicaid spending of approximately $900 billion.
Yet, the impact at the state level may vary greatly. Some states have become over-reliant on this tax scheme, including Connecticut. Since 2017, Connecticut’s provider tax rate on hospitals has consistently exceeded 5.5%, according to Kaiser. Yet, the state increased its hospital tax rate by roughly 40% to 50% ($375 million) in its new budget adopted in June, seemingly rocketing past the 6% safe harbor threshold, which would have required affirmative CMS approval before the July 4th effectiveness date for the moratorium.
When asked whether the state received CMS approval in time, the Lamont administration spokesman responded “The state has an existing agreement that runs through 7/1/26.” That’s a non-answer.
Government programs should be straightforward, transparent and cost-effective. The arcane provider tax scheme is the opposite. The reforms in the OBBB will save Uncle Sam money, redress the recent imbalance in the federal-state financial partnership, and, unfortunately, only barely restrain Medicaid’s explosive and unsustainable growth. Yet, it will move states in the direction of good government and living within their own means.
The original version of this column appeared in the Wall Street Journal on June 23, 2025 before enactment of the One Big Beautiful Bill Act.
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.